Outlook 2018: Tightening the legal net around technology and regulations

Recent sanctions on North Korea and Venezuela pose concerns to shipowners. Pictured here
Recent sanctions on North Korea and Venezuela pose concerns to shipowners. Pictured here

Maritime lawyers face a familiar mix of issues this year – as well as some new ones – courtesy of changes in technology and regulation.

Consider the case of blockchain technology, which is likely to see steady adoption by shipping.

On one hand, some advocates believe it could someday automate the contract process to the extent that it reduces legal fees. On the other hand, blockchain technology and the broader move towards automation should create more business for the maritime lawyers representing the shipping clients that use it.

“Blockchain has enormous potential to change the shipping landscape,” Allen Black, a partner with the firm Winston & Strawn, told IHS Markit. Black, who handles a broad range of maritime matters, including regulations and vessel financing and documentation, said blockchain is providing owners and charterers with more control over electronic documents, which will make cargo billing and other processes easier.

“It’s that kind of control, and the security that goes with it, that gives it great potential, which will help in areas such as marine financing as well,” he said.

As shipping becomes more automated, with an ever-decreasing need for manual intervention, there is a simultaneous and ever-increasing need to reduce the risk of cyber attacks – suggesting that cyber security will continue to grow in importance this year as a business field for maritime lawyers.

Part of that process will involve monitoring shipowner compliance with new guidelines and, potentially, new regulations aimed at making ships less vulnerable.

“The principle of having cyber guidelines is straightforward and makes sense. It’s not rocket science from a theoretical standpoint,” said Black. “But when it comes down to how to do it, including exactly what types of equipment and training to invest in and how much, it’s a greater challenge. It’s the implementation of the guidance that’s difficult.”

Another new wrinkle in the legal landscape involves the changing role that attorneys will play in the future as certain aspects of what they used to do are automated. Norton Rose Fulbright partner Brad Berman explained to IHS Markit in an interview last year, “We and a lot of firms looked at the question of ‘What are firms going to do in the future?’ – because you’re not going to need lawyers to proofread things and so on, so you have to get a new job – and ‘risk advisory’ became a mantra.”

The presidency of Donald Trump in the United States and the Brexit vote in the United Kingdom, as well as other geopolitical surprises, have heightened client demand for risk-advisory services, wherein lawyers provide guidance on how such developments pose legal and other risks.

Environmental compliance is yet another major focus in maritime legal circles in 2018. Several law firms contacted by IHS Markit pointed to increased scrutiny by regulators and port state control authorities of adherence to provisions under the International Maritime Organization’s Ballast Water Management Convention, which went into force in September 2017.

Extensions were granted for on-the-water vessels that could, in the case of certain ships, push back the need to install equipment until 2024. However, this will create the need to document the extension and provide the necessary paperwork. Lawyers speaking to IHS Markitexpect the US Coast Guard to be on the look-out for this paperwork in 2018.

As for maritime attorneys in New York, they should be busy this year catering to the legal needs of US-listed shipping companies. They are already seeing an uptick in securities litigation defence business following a dry spell in such cases. In the years following the financial crisis, securities claims were rare because shipping stocks were priced extremely low. Securities suits are generally driven by law firms seeking a share of the plaintiffs’ settlement, and when stocks are very low, there is little to be gained by suing.

As of early 2018, there were lawsuits in motion targeting three NASDAQ-listed shipping companies: DryShips, Top Ships, and Diana Containerships. In all three cases, the suits are related to last year’s share sales to a Canadian-backed entity called Kalani Investments.

In general, lawyers employed by US-listed companies should remain active this year preparing prospectuses as these owners seek to supplant commercial bank debt through the sale of bonds and other securities. The more that European banks pull back from ship lending, the more owners will need to rely on US capital markets.

If freight fundamentals improve, this could also be the year that shipping initial public offerings (IPOs) finally return; if so, lawyers handling documentation should pocket considerable fees.

One trend related to very small-cap US-listed shipping companies that emerged last year – which is likely to persist in 2018 – involves the heightened complexity of the transaction structures, which is a plus for legal fees. Seward & Kissel partner Gary Wolfe told IHS Markitin an interview last year, “There is nothing better for a lawyer than extremely complicated sets of documents and transactions, which is what we have with all these warrants for convertible notes, convertible preferred, and classes of preferred. And the reason we’re seeing it is because these are the structures used by investors in the micro-cap world.”

Meanwhile, 2018 should prove to be an intense year on the sanctions front, with shipowners facing recently enacted restrictions involving North Korea and Venezuela, and with the potential renewal of Iran sanctions remaining a concern.

In the case of North Korea, the United Nations passed a resolution in August 2017 to embargo all imports of North Korean coal, iron, lead, and seafood. The following month, the Trump administration tightened restrictions, signing an executive order banning all foreign-owned vessels that docked in North Korea from calling at a US port for 180 days. These restrictions were also extended to vessels that conduct ship-to-ship transfers with a vessel calling in North Korea in the past 180 days.

In November 2017, the United States sanctioned six North Korean shipping companies and four Chinese companies related to suspected ship-to-ship transfers.

In the case of Venezuela, the US government has banned the provision of new debt to Venezuela’s state-owned oil company, PDVSA, with maturities of more than 90 days by US companies or companies with a US connection. Lawyers are warning clients that if they allow PDVSA to take more than 90 days to pay charter hire or demurrage, they could technically be violating US sanctions.

Sanctions are also of more interest to US private-equity groups, because of their intensified interest in purchasing European shipping loan portfolios. Onerous regulations are making European banks more amenable to accepting a lower bid for their portfolios, which should facilitate more sales in 2018. One ‘catch’ relates to sanctions.

As Watson, Farley & Williams senior partner Frank Dunne explained at a Marine Money forum held in New York in November 2017, “Sanctions compliance is a very hot-button issue with US-based investors, whereas a lot of shipowners have a very relaxed attitude towards sanctions compliance.”

The complication, according to Dunne, is that in Germany, where a number of banks may be selling shipping-loan portfolios, “you cannot impose compliance with a non-German sanctions regime. So you can’t make a German shipowner comply with US sanctions, and that is troublesome for US funds”, considering the purchase of German shipping debt.

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